Leverage, Corporate Taxes and Debt Shifting of Multinationals: The Impact of Firm-Specific Risk

Abstract

Firms have the incentive to enhance debt nancing with higher corporate tax rates due to the increased value of interest deductions from the tax base. However, external debt is relatively costly for corporations with a high rm-specic risk. Moreover, for multinationals, the shifting of internal debt opens up additional tax saving opportunities. Using a large database of European multinationals for the years 1998{2006, rst, we provide evidence that the debt-to-assets ratio is positively aected by the statutory corporate tax rate. Second, we show that multinational subsidiaries use debt shifting with the parent as well as external debt to get advantage of the depreciation tax shield. Third, we provide evidence that subsidiaries with a high rm-specic risk are more involved in debt shifting